No "new normal" as stocks to bonds gain like the roaring ’90s

From John Paulson’s prediction for a collapse in Europe to Morgan Stanley’s warning that U.S. stocks would decline, almost all of Wall Street’s calls were wrong in 2012 as even the largest banks and most-successful investors failed to anticipate how government actions would influence markets.

Pimco, a unit of Munich-based insurer Allianz SE, was among the beneficiaries of the rise in markets. Gross’s $285 billion Total Return Fund gained 10.4 percent and beat 95 percent of its peers last year, Bloomberg data show. The performance marked a turnaround from 2011, when the fund lagged behind 70 percent of competitors.

Gross is concerned the same central-bank stimulus that ignited asset values will lead to declines.

“Investors should be alert to the long-term inflationary thrust of such check writing,” Gross wrote this month in a report. “While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the ‘out’ years towards which long- term bond yields are measured.”

Unemployment Rate

U.S. core consumer prices, which exclude food and energy, are forecast to increase 1.7 percent in 2012, according to a Bloomberg survey.

Employers added workers in December at about the same pace as the prior month. The unemployment rate held at 7.8 percent after the November figure was revised up from a previously reported 7.7 percent.

Gross domestic product is forecast to expand 2 percent in 2013 after increasing 2.2 percent last year, according to the median estimate of economists surveyed by Bloomberg.

“The economy is firing along, but it’s not strong enough for the Fed,” William O’Donnell, head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that trade with the central bank, said Jan. 3 in a telephone interview. “We expect another year of new normality, real GDP growth somewhere on the order of 1.75 to 2 percent for the whole of the year.”

Equities Rally

While stock market gains may be muted in the first quarter as Obama and his opponents struggle to resolve deficits and the economy grows less than 1 percent, equities will likely rally as much as 10 percent in 2013, according to Laurence Fink, the CEO of New York-based BlackRock Inc., the world’s largest asset manager, with assets of $3.7 trillion.

“Over the long run, the fundamentals of American corporations are very strong, the fundamentals of the American economy are as positive as I would ever remember in terms of housing, energy, our banking system,” Fink said Jan. 2 in an interview with Erik Schatzker and Scarlet Fu on “Market Makers” from Bloomberg Television. “We have great fundamentals in our country that no other country in the world has.”